Most economists measure their life's work in footnotes and journal citations. Alfred Kahn, who has died aged 93, could see his in the vapour trails from passenger aircraft that crisscross the world's skies.

Appointed by the US president Jimmy Carter as head of the Civil Aeronautics Board in 1977 – a post he did not want and knew little about – Kahn set about an unparalleled dismantling of the red tape that dictated every detail of airline operations in the US. The result reformed the airline industry into the blessing and curse of modern life that it has become, making Kahn the godfather to budget airlines such as Southwest in the US and its imitators EasyJet and Ryanair.

While Kahn's reforms made flying easier and cheaper, the comfort of air travel suffered. "In the old days, you liked that empty middle seat next to you. But in the old days, you also were paying for that middle seat next to you. You just didn't know it," Kahn said in an interview in 2007.

His success encouraged a wave of deregulation and privatisation on both sides of the Atlantic, making him a forerunner of the era of Thatcherism and Reaganomics. Kahn, though, described himself as a typically liberal Democrat who owed his signature achievement not just to Carter, but also to Edward Kennedy, the epitome of US liberalism, who led the battle to pass the Airline Deregulation Act of 1978 that gave legislative force to Kahn's reforms.

"Whenever competition is feasible, it is, for all its imperfections, superior to regulation as a means of serving the public interest," was how Kahn reconciled his political beliefs and economic teachings.

Kahn was born in Paterson, New Jersey. His father was a Russian immigrant who worked in a silk mill and eventually owned his own plant, allowing the family to send Fred – as he was known – to New York University in the depths of the Depression. Kahn graduated top of his class there at the age of 18, and went on to Yale to complete a PhD.

He worked briefly as an economist and was discharged from the army in 1943 for poor eyesight. By 1947 he was a member of the economics faculty at Cornell University, the institution with which he would remain associated for the rest of his life.

In 1970 Kahn published The Economics of Regulation, an influential work still cited as a reference. His first opportunity to put his work into practice arrived in 1974, when he was appointed by New York's governor to chair the powerful New York Public Service Commission, which regulated power, telephone and water utilities as well as buses and docks. He introduced innovations such as lower charges for offpeak electricity use, and Kahn's efforts led Carter to appoint him to the Civil Aeronautics Board.

It is now hard to envisage the iron grip that the board held over US airlines. It not only set ticket prices and approved schedules but also authorised individual routes. In most cases airlines had to charge the same fares as competitors flying to the same destinations. Kahn set about pulling apart the byzantine structure, provoking fierce resistance from the industry. Scolded by executives that he could not tell one plane from another, Kahn agreed, saying: "To me, they're all marginal costs with wings."

Carter gave Kahn an even harder mission in 1978 as America's "inflation tsar", chairing the Council on Wage and Price Stability. It was an impossible task. When Kahn warned of a serious economic "depression", he was upbraided by the White House for using such language. He then substituted the word "banana" for depression in his public utterances, only to be admonished by the head of United Fruit. Kahn retreated to Cornell to teach and indulge his passion for Gilbert and Sullivan.

Unusually for an academic, and especially for an economist, Kahn's other contribution to public life was his insistence on avoiding jargon. "If you can't explain what you're doing in plain English, you're probably doing something wrong," he argued.

Kahn is survived by his wife, Mary, a son and two daughters.

• Alfred Edward Kahn, economist, born 17 October 1917; died 27 December 2010